Exxon Mobil Corp (ExxonMobil) is the world’s fifth largest company by revenue and the third publicly traded company in terms of market capitalization. According to Iskakov and Yilmaz (2015), its successful performance in the market has been highlighted by Fortune 500 Report of 2014 indicating that it is the second most profitable company in the world. Apart from making profit, the company has also been facing risks because of its engagement in the development and production of unconventional resources due to its purchase of XTO Energy. The most significant thing about the company is that it continues performing well in the energy industry despite these risks standing out as the largest non-government owned company. In essence, the company’s superb performance rests upon its three operational divisions including upstream focused on oil exploration, shipping, extraction, and wholesale based in Houston, Texas. The second division is the downstream comprising of marketing, retail, and refining operations based in Fairfax, Virginia while the third division is the chemical division located in Houston, Texas. ExxonMobil’s performance is exceptional despite the risks it faces making it a justified leader in the energy industry.
Description and Brief History
Exxon Mobil Corporation is a multinational American Oil and Gas Company the headquarters of which are located in Irving, Texas. It has been originated directly from the Standard Oil Company associated with John Rockefeller. Bell and Lundblad (2011) indicate that it was created in 1999 after the merger of Standard Oil New Jersey and Standard Oil New York. It operates in the oil and gas industry and is rated as the world’s fifth company in terms of revenue. It is the third largest trade company considering the amount of market capitalization. The operations of the company could be termed strategic because they are functionally organized into diverse global operating divisions that help boost the level of profitability. For instance, subsidiaries such as SeaRiver Maritime and Imperial Oil Limited in Canada provide it with an operational advantage in the industry. The company continues to do well in terms of its net total assets which have been growing over the years. The company has suffered in terms of net income due to market fluctuations that has rocked the global oil and gas industry over the years. The financial data is illustrated in the Figure 1 below:
Sources of Risk and Uncertainty in the Company’s Operations
ExxonMobil’s financial statements give a clear view of the significant sources of risk and uncertainty in the course of its operations. The financial statements clearly reveal that most of the factors leading to risks and uncertainty are beyond the company’s control hence posing a threat to their management. This frequently puts the company in a difficult situation in the course of its operations. The sources of risk and uncertainty are discussed below.
Economic and Industry Factors
It is reasonable to say that oil and gas industry is primarily a commodity business. Bell and Lundblad (2011) explain that this indicates that the earnings and operations of the company could be affected significantly by the changes in prices for oil, petrochemicals and gas as well as the changes in the margin of refined products such as gasoline. The product margins and prices are highly dependent on global, local as well as regional events which have an impact on the demand and supply of the products and their frequent fluctuations keep the company at risk of loss and uncertainty in the market.
Competitive factors stand out as a significant source of risk and uncertainty since the energy industry is highly competitive. There is high competition among industry actors on matters related to fuel supply, as well as energy, and chemical needs for both individual and industrial users. A high level of competition puts pressure on its expenditures through technological acquisitions and improvements hence exposing it to the increased level of uncertainty and risk of loss.
The financial statements reveal that ExxonMobil’s performance depends on its ability to develop and manage major projects in a thoroughly planned way. According to McCarron (2016), some of the projects that might be sources of risk and uncertainty include the ability of the company to conclude favorable and long-term agreements with co-ventures, governments, and customers. Project factors also pose a risk to the company because of a decline in the natural fields for oil and possible security concerns such as terrorism that might affect the projects.
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Government Regulations that Have Affected Operations of the Company Domestically and Abroad
Environmental regulation by the domestic and foreign government has had an impact on the operations of Exxon. There is an environmental regulation of exploration and production industry or oil and gas. Federal and state governments have created regulations to protect the environment in which such activities take place. Schapiro (2015) considers that there are environmental groups in the United States such as the EPA which is a federal agency for protection of the environment. Exxon has been called upon in most cases to comply with the provisions of Bureau of Land Management. There are also regulations which have been created by the Interstate Oil and Gas Compact Commission which helps the states determine the matters that must be addressed by firms in order to protect the environment. One of such laws is the guideline for Commercial E&P waste management facilities. It informs the companies like Exxon on how to understand the regulations and incorporate risks.
At an international level, there are conventions that regulate the environmental impact generated by offshore gas and oil development and protection of the marine environment. Bell and Lundblad (2011) point out that currently there are up to 70 conventions and agreements that are directed towards protection of the marine environment. One of such conventions is the International Convention on Oil Pollution Preparedness, Response, and Co-operation (OPRC), London, 1990. Exxon is confident that its assets in gas and oil will less than likely be stranded even though they face a considerably tight regulation in terms of carbon emission. This is because fossil fuel is needed when it comes to the growth of the world’s economy.
The Inputs that Are Used in This Company’s Production Function and Challenges to Securing These Inputs
The inputs used in the company include drilling machinery, refinery construction machinery and skilled labor of engineers as well as ordinary laborers. Exxon is operating in an industry that is highly intensive in terms of capital and in most cases it requires that the company invests billions of dollars into its new exploration work. Iskakov and Yilmaz (2015) assert that with high levels of regulation being brought forward by the environmental groups as well as the government, it is matter of concern of the shareholders that the company is risking to have stranded assets due to the upcoming changes. But the company has remained optimistic that even if they acquire expensive assets in terms of inputs, they would not see a future without fossil energy and inputs will still bring returns in the long run. However, some of the key challenges encountered in securing these inputs include climate and security challenges, especially the threat of terrorism that could hamper the effective investment in production.
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Creation of New Markets and the Impact on Finances
In most cases as seen in the financial statements, Exxon has made it clear for the shareholders that the demand in the oil and gas is highly related to the economic growth rates. Schapiro (2015) considers that the economy of the United States has not been growing at a very fast rate because of the 2008 financial recession, but its steady growth has continued over the years. There are higher growth rates in most emerging markets in line with earlier projections made. This is attributed to the booming population growth as well as rising of the middle class. Ausick (2016) reveals that this is the reason as for why Exxon is opening up to the new markets in China where economic growth has been 7.6% since 2013.
The company has developed both upstream and downstream chemical businesses in the country. There are several integrated majors in the industry that are focused on the faster growing economies and are using them for their own long term growth. Exxon together with Chevron and other American companies have been hit by slow growth, which has affected China the previous year and therefore the profitability has not been boosted in this regard. McCarron (2016) reveals that the company has seen a record $10 billion in capital which is in line with the exploration and expenditures in projects related to oil and gas. The earnings went up to 58% in the year 2010 (McCarron, 2016).
Reasons behind Price Fluctuations
Over the previous year, prices for oil have eased by up to 10% since last spring, and it has peaked due to the loss of 1.3 million barrels because of the turmoil which was experienced in Libya and the fear that the impact would spread to other countries in Algeria and Saudi Arabia that offer substitute services to the company (Schapiro, 2015). Ever since that time, there has been increased production in Saudi Arabia and release of oil from strategic reserves that are located in the United States and some other industrialized countries. It is important to note that even if the demand and prices are highly elastic, most large oil companies like Exxon will continue struggling to keep up the production. Exxon’s earnings were not as expected even though there were higher oil prices in the industry. The company had higher revenue, which did not affect its earnings.
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At all fundamental levels, gas and oil are referred to as commodity businesses meaning that they operate in the markets driven by price. This means that profits in the industry have to strike the balance between demand and supply. According to McCarron (2016), Exxon believes that the energy demand globally is likely to rise by up to 35% in the coming three decades. The global economy will have doubled by that period. It indicates that the supply has to be increased in order to meet such demand. In an effort to meet such demands, there has been applied the technology of horizontal drilling and hydraulic fracturing which has led to tapping into oil and gas reservoirs that have previously never been tapped.
Ausick (2016) considers that current crude oil price stands at $92 for every barrel in the United States and Exxon can count on the price increase over the following year. In any case, the price should drift in significant amount, which means that most of the companies such as Exxon will be able to make greater profits. The situation will not be as anticipated though as banks will continue checking on inflation while monitoring the price increase. This tends to affect pricing decisions in the market in a sense that every firm has to keep up with the industry changes and the forces of demand and supply.
The Company’s Profitability and Industry Influences on Its Costs, Operations, and Profitability
Speaking about profitability, the concern of most investors should be taken into account. A higher ratio in terms of profitability is an indication of a good return on investment. It is worth understanding that a Russian company Rosneft has surpassed Exxon as the world’s biggest public traded company in oil and gas industry. However, a keen analysis of the operating margin of the ExxonMobil over the previous years indicates that in most cases the company averages have been better than within the industry. McCarron (2016) states that it also shows that the company margin has got closer to 20% in 2013, and this is quite encouraging. The profit margins also indicate that Exxon has been able to beat the industry averages. Generally speaking, the industry has influenced the costs and operations of the company through competitive practices. As companies such as Rosneft from Russia get the best from the industry, ExxonMobil is forced to spend more financial resources on technology and advertisement while at the same time expanding its operations overseas to remain the best in the industry. The industry’s impact on profitability is seen from the price-setting angle where ExxonMobil has to respond to the laws of supply and demand existing in the industry.
Operating Profit margin
Net Profit margin
Source: ExxonMobil Annual
The Competitive Environment, the Distribution of Market Power, and the Strategic Behavior of the Firm and Its Competitors
The key competition that is faced by ExxonMobil comes from such companies as Chevron Corporation, Royal Dutch Shell, ConcoPhilips, Total, and BP. This is an industry that is highly competitive since the competition emanates from within the industry and also from outside that is from other firms that fulfill energy, chemical and oil needs for the industrial and individual consumers. The company is competing with other players for the local and international market and continues using all legal means of competition. Iskakov and Yilmaz (2015) explain that the market power is variedly distributed among the companies in the industry because of the different marketing strategies of these firms. The competitive strategic behavior that has worked for Exxon and its competitors is revealed in the fact that they have managed to cut on the expenses and manage them effectively. The management continues concentrating on the reduction of unit costs and improvement of production efficiency.
ExxonMobil is in the oligopoly market structure which is an industry in which the suppliers are few but large and have the ability to affect the price rates. In this market, most of the rivals will continue monitoring and responding to the choices that are made. There has been tension in the industry over what the other player will do in terms of influencing the price for the products.
Exxon makes its pricing and production decisions after considering the price for crude oil and the amount of taxes that are paid. To produce certain products such as gasoline, Exxon has to purchase crude oil at the market price and then refine it to create other products such as gasoline. The price for crude oil is set by global factors as influenced by the companies from Saudi Arabia and even Russia. McCarron (2016) asserts that the other factor that Exxon considers is the tax effect charged by the federal and state authorities. One would ask why the price for Exxon products changes according to the gasoline price fluctuations. The most important answer is based on the fact that the global price for crude oil also fluctuates. One of the elements that are in line with the theoretical model is the view that different companies set different prices for the same commodities due to the difference in the methods they use to refine crude oil.
Exxon does not only rely on price when it comes to ensuring that the company creates an extra sale. What the company has continued doing is making investments in other strategies that are not related to price such as promotion. The company is creating brand awareness among most of the customers. The company is running several programs, which target issues that have a worldwide effect such as malaria. This effectively attracts more consumers who feel themselves socially responsible. The company has also used backward integration to its advantage whereby it has been able to acquire several smaller companies in order to deal with competition. It is the parent company to Mobil, Esso and ExxonMobil companies.
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Mistakes of the Company and Recommendations
Exxon has a long history and most of its business ventures are created along a significant line of history. The financial strength of the company has encouraged it in that it is able to invest in a long cycle of assets to ensure that there is a shareholder value. The company made a mistake in that it did not anticipate that at one point there would be a drop in oil prices which would lead to the financial problems within the company. Ausick (2016) considers that there has been a 71% plunge in crude oil prices since summer of 2014. The price in 2016 is at $33 per barrel which has led the company into very steep cutting of capital expenditure. This is expected to have an implication on the company as well as the industry in terms of profitability. There is a harsh industry downturn and Exxon has to figure out how it will ensure future growth of profits. The company cash flows the previous year were not good enough to be able to cut on the dividends and much of this was paid through borrowings.
The best recommendation is that the company should take advantage of its triple A credit ratings and get proper financial muscle through affordable debts. This will ensure less strain on capital even if they try to gain access to new markets and carry out new explorations.
Exxon Mobil Corp is a company that has faced and will continue facing risks due to the fact that it deals with unconventional resources development programs. The above risk factors need to be addressed in order to ensure that in the long run the company does not experience great financial losses which would affect the stock prices and reduce investment by shareholders. In the future, ExxonMobil will need to be more careful with the possible fluctuations in the price for oil to avoid losses. Continued diversification of its activities and products is also vital for facilitating its sustainability in the future.